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Rio Doce Turns a Hard Corner

Rio Doce (NYSE: RIO  ) , also known as Companhia Vale do Rio Doce or CVRD, has a problem that many companies would love to claim: How do you top yourself after a fantastic year? The fact is, Rio Doce's turned the corner, and while 2006 will still be a fine year, last year's huge year-on-year growth probably won't be repeatable this time around. That said, the company is still growing, and it just may be enough of a value yet to merit a closer look.

It was clear from the start that this would be a slower-growth quarter at one of the world's leading iron ore producers. Revenue was up 16% -- normally great for a company this size, but not when you've gotten used to growth in the 30%-50% range. Volume growth made up about two-thirds of the growth this time around, as the company produced more iron ore and substantially more alumina, but less iron pellets, manganese, and ferro-alloys.

Profitability also lagged Rio Doce's recent levels. Gross margins fell a bit, hurt by currency moves, and Rio Doce posted growth of about 6% in adjusted operating income and 7% in adjusted EBITDA. Margins and returns are still quite good relative to other mineral and metal companies, though.

Management had several interesting comments, pointing out that this has been the longest expansion in these markets in 40 years, but that Chinese demand continued to keep the pressure on for suppliers. What's more, the company is holding firm on pricing, and given that so much iron production is concentrated in Rio Doce, Rio Tinto (NYSE: RTP  ) , and BHPBilliton (NYSE: BHP  ) , it seems probable that management has a good sense of what impending supply growth will look like.

It's also worth noting that Rio Doce isn't just about iron. Aluminum is an increasingly important commodity to the company, and while its production is well short of that at Alcan (NYSE: AL  ) or Alcoa (NYSE: AA  ) , it's a lower-cost producer of a commodity with firm pricing right now. Likewise for copper -- the company probably won't be producing the metal in truly significant amounts before this market eases off, but it will help long-term diversification.

Investing in Rio Doce is a play on world economic activity at its most basic level. If economies stay strong, they'll keep consuming steel (and, implicitly, iron), aluminum, and other metals. And while currency moves are starting to make some impact on the bottom line, it looks to this Fool like Rio Doce isn't close to hitting the rapids just yet.

For more Foolish thoughts on basic materials:

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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).

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Stephen D.

I'm an ex-Wall Street sell-side and buy-side analyst who has spent most of the last 10 years writing on a wide range of industries and investment ideas.

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